Foot Massage Doubles and Chinese Doubt Official Price Data

By Bloomberg News -
Aug 25, 2010

Lydia Wang, a 28-year-old marketing
manager in Shanghai, gripes that the shoes and clothing she
normally buys are at least 50 percent pricier than in 2009. Wu
Sengyun, a 54-year-old retiree in the coastal city of Ningbo,
Zhejiang, says prices of fruit and fish are up more than 20
percent in the past year.

Willy Lin has cut back on free drumsticks in the canteen of
his Jiangxi clothing factory as meat and vegetables grow dear.
“The workers suffer,” he says. “Everybody is crying.”

Officially, China’s consumer price inflation topped out at
3.3 percent in July compared to a year before, a 21-month high.
Officials say the spike is a one-off caused by crop damage from
recent flooding. Other costs, they say, such as cars, mobile
phone bills, and clothing, are falling, and pressure on prices
should ease as the economy cools. At an Aug. 12 press
conference, Pan Jiancheng, a deputy director in the statistics
bureau, said the inflationary threat was “overhyped.”

“There has been a jump in prices that isn’t reflected in
the numbers,” said Chinese Academy of Social Sciences economist
Yu Yongding, a former adviser to China’s central bank.

Michael Pettis, a finance professor at Peking University,
said he wonders how a country that grew 10.3 percent last
quarter and is seeing upward pressure on wages could register a
price rise of a few percentage points. Multinationals in China
expect to raise wages an average of 8.4 percent this year,
according to Hewitt Associates Inc., a human resources
consultant.

Ordinary Chinese

Ordinary Chinese have yet to see increases in their
housing, education, and medical expenses reflected in the
official numbers, these analysts said.

“Inflation could well be 6 percent now for most people in
China,” Peking University’s Pettis said.

If the doubters are right, then the government has an
inflation problem that it either hasn’t figured out how to
measure, or has chosen to ignore. Other vital Chinese
statistics, like retail sales and unemployment, have also been
murky. In the case of inflation, misjudging could prevent the
kind of swift action needed to tame prices now, and force the
government to apply harsher measures later, such as an increase
in interest rates or an appreciation of the currency to curb
growth. There are political risks too: Social unrest in China
has been triggered when ordinary workers can’t keep up with the
cost of living.

Data ‘Oddity’

Unlike most countries, China refuses to release in detail
how much weighting it gives different product categories when
calculating inflation, a situation that World Bank senior
economist Louis Kuijs called an “oddity.” An official with the
statistics bureau said there has been no major change in the
basket that makes up the price index since 2005. Plans call to
adjust the weighting next year to reflect housing costs more and
food prices less, said the official, who declined to be
identified because of agency rules.

Chinese consumers, when asked, will detail how household
expenses have changed in the past decade. Medical costs are the
No. 1 concern for 84 percent of China’s rural residents,
according to a recent survey by the Economist Intelligence Unit.
Officially, medical prices are only up 2.8 percent so far this
year. That number does not include the cost of gifts to hospital
doctors and administrators to ensure adequate care.

Housing and rising rental costs also eat up more of Chinese
budgets. For 26-year-old Beijing resident Wang Yulu, the monthly
rent of her 35-square-meter one-bedroom apartment just increased
more than 20 percent, to $338.

Too Expensive

“It’s too expensive,” said Wang, who works in the Beijing
office of a Hong Kong advertising company. “I’m thinking of
moving.”

Getting a handle on rising prices is a particular challenge
in China. Hundreds of millions of rural Chinese keep moving to
cities, pushing up rents and food prices in urban coastal areas.
The prices charged by millions of restaurants, coffee shops, and
fitness centers go largely unrecorded as entrepreneurs evade
taxes. A standard foot massage, popular in Chinese cities, has
risen from around $10 in 2008 to about twice that today, said
Zoe Wang, a 29-year-old strategy consultant from Shanghai.

“Unfortunately, my salary didn’t double,” she said.
Official figures only record a 0.4 percent rise in recreation
and education costs this year. China doesn’t separate these two
categories in its figures.

Residents in far-western China face higher prices in part
because of the long distances products must travel to reach
them. A fast-growing population of pensioners feels price
increases much more acutely than others.

Pensions Spent

Said retiree Wei Mingxiang, 54, as she shopped carefully in
Beijing’s Rundeli vegetable market: “Prices have gone up too
far. My entire monthly pension of $147 is spent on food.” One
staple, cowpeas, recently doubled in price in two weeks to 40
cents a pound.

By periodically releasing wheat, rice, and corn from its
reserves, the government has avoided the 100 percent price surge
that hit global grain markets in 2007 and 2008. Beijing
continues to cap prices on everything from phone bills to water,
electricity, and fuel prices, and when it wants to cool growth
the government orders banks to stop lending.

“The government has tended to use less mainstream
instruments that economists don’t like so much,” said Kuijs of
the World Bank. “And they tend to use interest rates less.”

Deposit Rates

One-year deposit rates at 2.25 percent have not been
changed since November 2008, which means Chinese savers are
actually losing money now that inflation has passed 3 percent.
Officials fear higher rates could draw speculative investors
into China.

Some analysts said that Beijing is doing a decent job of
calculating prices. Arthur Kroeber, the Beijing-based managing
director of economic consultancy Dragonomics, estimated that
actual inflation may exceed the official figure but by not much
more than one percentage point. Kroeber added that a tightening
labor market and rising wages will push China into higher
inflation in the coming years.

Others wondered whether the historic aversion of China’s
rulers to the political risks of inflation creates pressures to
keep official figures low.

Factory Jobs

Similar pressures help explain how official unemployment
targets of just over 4 percent were met in 2008 and 2009, when
China’s factories laid off tens of millions of workers, some
economists said.

“The government has made it quite clear” what its
inflation target is for 2010, Tsinghua University management
professor Patrick Chovanec blogged on Aug. 12. “A whole parade
of official sources have issued statements over the past few
weeks predicting, with the unruffled, enigmatic certainty one
normally associates with a blackjack dealer dealing a fixed
deck, that inflation will come in right at 3 percent this
year.”